This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the top of any article.

Regulators Question Pfizer’s Earnings

Pfizer Inc., the world’s biggest drugmaker, was asked by U.S. regulators how it recorded high profit overseas and losses at home when 40 percent of its sales were inside the U.S.

In a May 9 letter filed today, Securities and Exchange Commission staff asked New York-based Pfizer to explain why earnings before taxes outside the U.S. were $15 billion in 2011 while losses within the country were $2.2 billion. By piling up profit in low-tax jurisdictions overseas, Pfizer has been able to cut its tax rate reported to investors and boost results.

“These operating results appear to be inconsistent with your domestic and international revenues, which in 2011 were $26.9 billion and $40.5 billion, respectively,” wrote Jim Rosenberg, the commission’s senior assistant chief accountant.

Pfizer is one of the most aggressive U.S. companies reporting income in countries with lower tax rates than the U.S. as a way of reducing their effective tax rate, according to data compiled by Bloomberg. The drugmaker had the second-highest amount of profit kept overseas, $63 billion, behind only General Electric Co., according to securities filings as of March.

Pfizer is among the companies that have lobbied U.S. lawmakers for a tax holiday that would allow it to bring some of the overseas profit back to the country at a lower tax rate. Mitt Romney, the Republican presidential nominee, argued for such a holiday in his Oct. 3 debate with President Barack Obama.

In its response to regulators, Pfizer wrote that giving more information about how it distributed its earnings among various locations wouldn’t be helpful to investors.

“The geographical mix of revenues is not a good indicator of the split between domestic and international pretax earnings for purposes of financial statement presentation, especially for a multinational company that manages its operations on a global basis,” wrote Loretta V. Cangialosi, Pfizer’s controller.

“We do not believe that disclosure regarding the reasons for the geographical split of pretax earnings would be meaningful or useful to investors,” she wrote on May 22.

In 2009, according to the correspondence, Pfizer cut 9.4 percent from its tax rate by designating profit as overseas. And in 2011 the company reduced the rate 3.3 percent.

Pfizer is slimming down by divesting its animal health and infant nutrition units to focus on producing new medicines to replace revenue from its best-selling cholesterol pill Lipitor, which until it lost patent protection last year was the top drug in the world with about $9.6 billion in 2011 sales.

Pfizer has paid all the taxes it is legally obligated to, said Joan Campion, a company spokeswoman.

150 Countries

“We conduct business in more than 150 countries and face significant competition from companies located outside the United States, including many competitors located in lower tax jurisdictions,” Campion said in an e-mail. “At all times and wherever we operate, Pfizer complies with the appropriate tax law.”

Pfizer said in an Aug. 27 letter that it would add more disclosure, including a line saying, “the jurisdictional location of earnings is a significant component of our effective tax rate each year as tax rates outside of the U.S. are generally lower than the U.S. statutory income tax rate.” The company would also explain how tax breaks in Ireland, Singapore and Puerto Rico lower its rates.

“We believe the disclosures provided are sufficient and have received a response from the SEC that it has no further comments on those filings,” Campion said.

Pfizer is not alone in getting these questions from the SEC. In December, the commission questioned Google about its earnings in other countries.

Treasury & Risk

Treasury & Risk is an online publication and robust website designed to meet the information needs of finance, treasury, and risk management professionals. Our editorial content, delivered through multiple interactive channels, mixes strategic insights from thought leaders with in-depth analysis of best practices, original research projects, and case studies with corporate innovators.